The turnaround battering investors who use mathematical models to pick stocks is making heroes out of last year’s worst- performing money managers. Bill Miller, who lost 55 percent in 2008 running the Legg Mason Value Trust after beating the Standard & Poor’s 500 Index for a record 15 straight years, is topping the measure again. Value investors buy companies that are the cheapest relative to their earnings or assets.

Man Group Plc’s AHL Diversified Futures Ltd., a computerized trading fund, lost 7.1 percent in net asset value from March 9 through last week after surging 25 percent in 2008. In addition to futures on stock indexes, the fund invests in contracts linked to currencies, bonds, commodities and interest rates.

Skeptical of Rally

The 28 percent rally in the MSCI World Index from its March 9 low to April 17 is making everyone from Harbinger Capital Partners’s Philip Falcone to NYSE Euronext Chief Executive Officer Duncan Niederauer skeptical the gains will last. Profits at S&P 500 companies dropped six straight quarters through December and are forecast to decline until September, suggesting the stock market will struggle to extend its advance.

The S&P 500 tumbled 4.3 percent to 832.39 today as concern grew that credit losses are worsening and lower commodity prices dragged down energy and material producers.

The 130 companies in the S&P 500 and Europe’s Dow Jones Stoxx 600 Index with debt-to-equity ratios above 50 percent and a return on assets of less than zero in the most recently reported period — more than half of them banks and consumer companies — rose an average of 82 percent from March 9 through April 17, data compiled by Bloomberg show. That compares with a 29 percent increase for the S&P 500 and a 25 percent jump in the Stoxx 600.

Trend Following

Last week’s 1.5 percent rise in the S&P 500 left it down 3.7 percent this year. The Stoxx 600 gained 4.7 percent, almost erasing its 0.7 percent loss for 2009.

Momentum strategies likely returned 14 percent in the U.S. and 35 percent in Europe in 2008 because industries that tumbled the most in the previous year continued to retreat, according to JPMorgan estimates. These managers sold stocks short, borrowing shares and selling them, hoping to profit by repaying the loans with lower-priced equities. Financial stocks in the U.S. peaked in February 2007, two months before any of the other nine industries in the S&P 500, data compiled by Bloomberg show.

The MSCI World Financials Index slumped 79 percent from its May 7, 2007, peak through March 9, 2009, outpacing the MSCI World Index’s 57 percent drop as losses tied to subprime mortgages climbed toward $1.3 trillion. Since then, the rebound in banks has been almost twice that of the next-best industry.

$12.8 Trillion Pledged

Momentum strategies failed after government efforts to fix the financial system spurred speculation the first global recession since World War II will end.

Banks and other financial institutions in the S&P 500 pared their 2009 losses from as much as 52 percent as lenders from New York-based Citigroup Inc. to Bank of America of Charlotte, North Carolina, said they were profitable at the start of the year. Retailers surged on optimism that the $12.8 trillion pledged by the Federal Reserve and U.S. government will boost the economy and consumer spending.

The net asset value of Man Group’s AHL Diversified fund dropped to $38.71 a share on April 13 from $41.66 on March 9. The MSCI World Index of 23 developed countries rose 26 percent in the same period. London-based Man Group is the world’s largest publicly traded hedge fund manager.

The AHL Diversified Futures fund climbed 25 percent in 2008, according to data compiled by Bloomberg. The MSCI World slumped 42 percent last year, the biggest drop since the index was created in 1970.

‘Wrong Places’

“Momentum is one factor that does not work in turnarounds,” said Juri Sarbach, a Zurich-based quantitative fund manager who uses the technique and other strategies at Clariden Leu AG, which oversees $81 billion. “When you seek momentum and you have a shift like the one we saw since March, you may find yourself positioned in all the wrong places.”

While momentum investors have suffered in 2009, last year’s worst performers, Miller’s Legg Mason Value Trust and Harry Lange of the Fidelity Magellan Fund, are making comebacks with bets on technology companies.

Both lost more client money than 98 percent of their rivals in 2008 by clinging to or doubling down on shares of financials.

Now, Miller is outperforming 68 percent of his peers with a 1.2 percent gain in 2009 after boosting his stake in Hopkinton, Massachusetts-based EMC Corp. in the fourth quarter. Shares of the world’s biggest maker of storage computers have added 22 percent in 2009.

Corning Rallies

Lange’s holdings of Corning Inc. contributed to Magellan’s 14 percent jump in March. Corning, New York-based Corning, the largest producer of glass for flat-panel televisions, is up 60 percent this year after saying in March that volumes will exceed its previous estimate.

Maria Rosati, a spokeswoman for Baltimore-based Legg Mason Inc., didn’t return a telephone call seeking a comment. Lange wasn’t available for an interview, said Alexi Maravel, a spokesman for Boston-based Fidelity Investments. Man Group’s Armel Leslie declined to comment.

This year’s gains are making some investors uneasy. Markets “are far from stabilization” because rising unemployment will hold down earnings and consumers have too much debt, Harbinger’s Falcone wrote in a letter to investors on April 15. Harbinger oversees about $7 billion in New York.

Unemployment Rate

The U.S. jobless rate climbed to 8.5 percent in March, the highest in 25 years, and is forecast to rise to 9.5 percent in the fourth quarter, according to the median estimate of 59 economists surveyed by Bloomberg. The Fed’s index of consumer credit outstanding hit a record $2.58 trillion in September and was $2.56 trillion in February.

Profits at S&P 500 companies dropped 38 percent in the first quarter and may slide 32 percent in the second, according to analysts’ estimates compiled by Bloomberg.

So far, first-quarter incomes have fallen less than forecast. A total of 66 percent of the S&P 500 companies that announced results since earnings season began two weeks ago beat Wall Street projections, the data show.

While credit markets are improving, they haven’t completely recovered. The difference between what banks and the Treasury pay to borrow money for three months, the so-called TED spread, is at 0.97 percentage point, down from 1.35 points at the end of 2008. It averaged 0.36 points in 2006.

VIX Index

Equity volatility also remains elevated as options dealers resist lowering the price of insuring against losses. The Chicago Board Options Exchange Volatility Index has averaged 44 this year. While down from a record close of 81 in November, that’s still more than twice the average in its 19-year history.

Last month’s surge in equities was accompanied by a jump in trading for Citigroup and Bank of America. The five most active shares on U.S. markets last month accounted for an average of 18 percent of total volume in March and April, compared with 11 percent from June through December of last year, according to data compiled by Bloomberg.

“The majority of institutional investors are waiting and watching, and we need to see a rally with good volume that is more broadly distributed for them to really get back in,” NYSE’s Niederauer said in a telephone interview on April 17. “I’d love to believe that this is the rally that is the precursor of economic recovery in six to nine months, but I’m just trying to keep people from getting too carried away.”

‘Never Pays’

A gauge of non-financial stocks in Europe with characteristics such as an increasing returns on assets, declining debt-to-asset ratios and cash flow that exceeds net income underperformed companies with the opposite criteria by about two-thirds since March 9, data compiled by Bloomberg and New York-based Morgan Stanley show. Morgan Stanley uses a system for analyzing balance sheets developed by Stanford University Professor Joseph Piotroski in 2000.

Companies that Piotroski ranked highest have outperformed the lowest-rated stocks every year but two since 1994, data from New York-based JPMorgan show.

“Buying bad stocks never pays,” said Marco Dion, a London-based quantitative analyst at JPMorgan. Still, “this start of the year will turn out to be quite challenging for the quant community. Most quant managers use some flavor of price momentum in their process and noticing that this factor is failing and in such a significant manner is therefore not good news.”

To contact the reporters on this story: Alexis Xydias in London at [email protected]; Lynn Thomasson in New York at [email protected].